ECONOMIC REFORMS SINCE 1991

LIBERALISATION, PRIVATISATION AND GLOBALISATION

INTRODUCTION
❖ In 1991, India met with an economic crisis relating to its external debt — the
government was not able to make repayments on its borrowings from abroad;
foreign exchange reserves, which we generally maintain to import petrol and
other important items, dropped to levels that were not sufficient for even a fortnight.
The crisis was further compounded by rising prices of essential goods. All these led
the government to introduce a new set of policy measures which changed the
direction of our developmental strategies.

❖ The origin of the financial crisis can be traced from the inefficient management of the
Indian economy in the 1980s. For implementing various policies and its general
administration, the government generates funds from various sources such as
taxation, running of public sector enterprises etc. When expenditure is more than
income, the government borrows to finance the deficit from banks and also from
people within the country and from international financial institutions. When we
import goods like petroleum, we pay in dollars which we earn from our exports.

❖ Imports grew at a very high rate without matching growth of exports. Foreign
exchange reserves declined to a level that was not adequate to finance imports for
more than two weeks.

❖ India approached the International Bank for Reconstruction and Development

(IBRD), popularly known as World Bank and the International Monetary Fund
(IMF), and received $7 billion as loan to manage the crisis. For availing the loan,
these international agencies expected India to liberalize and open up the economy by
removing restrictions on the private sector, reduce the role of the government in
many areas and remove trade restrictions.

❖ In July 1991, Prime Minister Narsimha Rav along with his finance minister Dr.
Manmohan Singh initiated the economic liberalization of 1991, to remove the
inefficiencies in the economic system. It had mainly following two parts-

NEP-1991

1- Stabilization/demand side 2- Structural adjustment /supply

measures side measures (Long run
(Short- runs approach) approach)
A. Control of inflation A. Trade and capital flow reform
B. Fiscal correction B. Industrial deregulation
C. Improvement in BOP C. Public sector reform and
disinvestment
D. Financial sector reform
E. Towards international competition

1- Liberalization 2- Privatization 3- Globalization

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 Liberalization:
Meaning of liberalization: “it means removing all unnecessary controls and restrictions
like permits, license, protectionist duties, quotas etc. imposed by the government.”
Deregulation of Industrial Sector:
In India, regulatory mechanisms were enforced in various ways-
(i) industrial licensing under which every entrepreneur had to get permission from
government officials to start a firm, close a firm or to decide the amount of goods
that could be produced
(ii) private sector was not allowed in many industries
(iii) some goods could be produced only in small scale industries and
(iv) Controls on price fixation and distribution of selected industrial products.
The reform policies introduced in and after 1991 removed many of these restrictions.
Industrial licensing was abolished for almost all but product categories —
(i) alcohol,
(ii) cigarettes,
(iii) hazardous chemicals,
(iv) industrial explosives,
(v) electronics,
(vi) Aerospace and drugs and pharmaceuticals.
The only industries which are now reserved for the public sector are
(i) defense equipments,
(ii) atomic energy generation and
(iii) Railway transport.
Many goods produced by small scale industries have now been dereserved. In many
industries, the market has been allowed to determine the prices.
Financial Sector Reforms:
“Financial sector includes financial institutions such as commercial banks, investment banks,
stock exchange operations and foreign exchange market.” The financial sector in India is
controlled by the Reserve Bank of India (RBI). Aims of financial sector reforms are to reduce
the role of RBI from regulator to facilitator of financial sector. The reform policies led –
(i) The establishment of private sector banks, Indian as well as foreign.
(ii) Foreign investment limit in banks was raised to around 50 per cent.
(iii) Those banks which fulfill certain conditions have been given freedom to set up
new branches without the approval of the RBI and rationalize their existing
branch networks.
(iv) Though banks have been given permission to generate resources from India and
abroad, certain managerial aspects have been retained with the RBI to safeguard
the interests of the accountholders and the nation.
(v) Foreign Institutional Investors (FII) such as merchant bankers, mutual
funds and pension funds are now allowed to invest in Indian financial markets.
Tax Reforms/ fiscal policy reforms: Tax reforms are concerned with the reforms in
government’s taxation and public expenditure policies which are collectively known as its
fiscal policy. There are two types of taxes: direct and indirect.
Direct taxes consist of taxes on incomes of individuals as well as profits of business
enterprises.
(i) Since 1991, there has been a continuous reduction in the taxes on individual
incomes as it was felt that high rates of income tax were an important reason for
tax evasion.
(ii) It is now widely accepted that moderate rates of income tax encourage savings
and voluntary disclosure of income.
(iii) The rate of corporation tax, which was very high earlier, has been gradually
reduced.

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Efforts have also been made to reform the indirect taxes, taxes levied on commodities-
(i) In order to facilitate the establishment of a common national market for goods
and commodities.
(ii) Another component of reforms in this area is simplification.
(iii) In order to encourage better compliance on the part of taxpayers many
procedures have been simplified and the rates also substantially lowered.

Foreign Exchange Reforms:

The first important reform in the external sector was made in the foreign exchange market.
(i) In 1991, as an immediate measure to resolve the balance of payments crisis, the
rupee was devalued against foreign currencies. This led to an increase in the
inflow of foreign exchange.
(ii) It also set the tone to free the determination of rupee value in the foreign
exchange market from government control.
(iii) Now, more often than not, markets determine exchange rates based on the
demand and supply of foreign exchange.
Trade and Investment Policy Reforms:
Liberalization of trade and investment regime was initiated to increase international
competitiveness.
The trade policy reforms aimed at
(i) dismantling of quantitative restrictions on imports and exports reduction of tariff
rates and,
(ii) Removal of licensing procedures for imports. Import licensing was abolished
except in case of hazardous and environmentally sensitive industries.
(iii) Quantitative restrictions on imports of manufactured consumer goods and
agricultural products were also fully removed from April 2001.
(iv) Export duties have been removed to increase the competitive position of Indian
goods in the international markets.

PRIVATISATION
It implies shedding of the ownership or management of a government owned enterprise.
Government
Companies are converted into private companies in two ways-
(i) by withdrawal of the government from ownership and management of public
sector companies and,
(ii) By outright sale of public sector companies.
“Privatization of the public sector undertakings by selling off part of the equity of PSUs to
the public is known as disinvestment”. The purpose of the sale, according to the
government, was mainly -
(i) To improve financial discipline and facilitate modernization.
(ii) It was also envisaged that private capital and managerial capabilities could be
effectively utilized to improve the performance of the PSUs.
(iii) The government envisaged that privatization could provide strong impetus to the
inflow of FDI.
The government has also made attempts to improve the efficiency of PSUs by giving them
autonomy in taking managerial decisions. For instance, some PSUs have been granted
special status as maharatnas, navratnas and miniratnas.
A few examples of public enterprises with their status are as follows:
(i) Maharatnas – (a) Indian Oil Corporation Limited, and (b) Steel Authority of India
Limited,
(ii) Navratnas – (a) Bharat Heavy Electricals Limited, (b) Mahanagar Telephone Nigam
Limited; and

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(iii) Miniratnas – (a) Bharat Sanchar Nigam Limited; (b) Airport Authority of India and (c)
Indian Railway Catering and Tourism Corporation Limited.
GLOBALISATION
“Globalization is generally understood to mean integration of the economy of the country
with the world economy” It is turning the world into one whole or creating a borderless
world.
Merits of globalization:
1) Flexible production methods.
2) Raise foreign capital.
3) Quality improvement.
4) Rise in employment.
5) Rise in banking and foreign sector efficiency.
6) Accelerate human development.
7) Reduce poverty.
8) Enhance integration.
Demerits of globalization:
1) Adverse effect on local production
2) Mountinting strikes
3) Small biasness is adversely affected.
4) Raising depth of inequality.

Outsourcing:
❖ In outsourcing, a company hires regular service from external sources, mostly from
other countries, which was previously provided internally or from within the country
(like legal advice, computer service, advertisement, security — each provided by
respective departments of the company).
❖ Many of the services such as voice-based business processes (popularly known as
BPO or call centers), record keeping, accountancy, banking services, music
recording, film editing, book transcription, clinical advice or even teaching are being
outsourced by companies in developed countries to India.
❖ The low wage rates and availability of skilled manpower in India have made it a
destination for global outsourcing in the post-reform period.

World Trade Organization (WTO):

❖ The WTO was founded in January 1995 as the successor organization to the General
Agreement on Trade and Tariff (GATT).
❖ GATT was established in 1948 with 23 countries as the global trade organization to
administer all multilateral trade agreements by providing equal opportunities to
all countries in the international market for trading purposes.
Achievement of the policy of LPG:
1) Rise in GDP growth.
2) Rise in foreign exchange reserve.
3) Control of inflation.
4) Rise in inflow of foreign capital.
5) Rise in the integration with the world economy.
6) Rise in competitiveness of industrial sector.
Criticism and challenges of the policy of LPG:
❖ Growth and Employment:
Though the GDP growth rate has increased in the reform period, scholars point out
that the reform-led growth has not generated sufficient employment opportunities in
the country.
❖ Reforms in Agriculture:

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 A. Reforms have not been able to benefit agriculture, where the growth rate has
been Decelerating. Public investment in agriculture sector especially in
infrastructure, which includes irrigation, power, roads, market linkages and
research and extension (which played a crucial role in the Green Revolution),
has been reduced in the reform period.
B. These have adversely affected Indian farmers as they now have to face
increased international competition.
C. There has been a shift from production for the domestic market towards
production for the export market focusing on cash crops in lieu of production
of food grains. This puts pressure on prices of food grains.
❖ Reforms in Industry:
A. Industrial growth has also recorded a slowdown. This is because of decreasing
demand of industrial products due to various reasons such as cheaper
imports, inadequate investment in infrastructure etc.
B. Moreover, a developing country like India still does not have the access to
developed countries’ markets because of high non-tariff barriers.
❖ Disinvestment:
A. Every year, the government fixes a target for disinvestment of PSUs. For
instance, in 1991-92, it was targeted to mobilize Rs 2,500 crore through
disinvestment.
B. Critics point out that the assets of PSUs have been undervalued and sold to
the private sector.
C. This means that there has been a substantial loss to the government.
Moreover, the proceeds from disinvestment were used to offset the shortage
of government revenues rather than using it for the development of PSUs and
building social infrastructure in the country.
❖ Reforms and Fiscal Policies:
A. Economic reforms have placed limits on the growth of public expenditure
especially in social sectors. The tax reductions in the reform period aimed at
yielding larger revenue and to curb tax evasion, have not resulted in increase
in tax revenue for the government.
B. Also, the reform policies involving tariff reduction have curtailed the scope for
raising revenue through customs duties.
C. In order to attract foreign investment, tax incentives were provided to foreign
investors which further reduced the scope for raising tax revenues. This has a
negative impact on developmental and welfare expenditures.
CONCLUSION:
The process of globalisation through liberalisation and privatisation policies has produced
positive as well as negative results. it has increased the income and quality of consumption
of only high-income groups and the growth has been concentrated only in some select areas
in the services sector such as telecommunication, information technology, finance,
entertainment, travel and hospitality services, real estate and trade, rather than vital
sectors such as agriculture and industry which provide livelihoods to millions of people in
the country.

Question 1: Why were reforms introduced in India?

Answer: We know that since independence, India followed the mixed economy framework
by combining the advantages of the market economic system wit those of the planned
economic system. But over the years, this policy resulted in the establishment of a variety
of rules and laws which were aimed at controlling and regulating the economy and instead
ended up hampering the process of growth and development.
The economy was facing problems of declining foreign exchange, growing imports without
matching rise in exports and high inflation. India changed its economic policies in 1991 due

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to a financial crisis and pressure from international organizations like the World Bank and
IMF.
Question 2: How Many countries are members of the WTO?
Answer: The WTO has 153 member countries.
Question 3: What is the most important function of RBI?
Answer: The most important function of RBI is to control and facilitate the financial sector
of India. All the banks and other financial institutions in India are controlled through various
norms and regulations of the RBI.
Question 4: How was RBI controlling the commercial banks?
Answer: All the banks in India are controlled through various norms and regulations of the
RBI. The RBI decides the amount of money that the banks can keep with themselves, fixes
interest rates, nature of lending to various sectors etc.
Question 5: What do you understand by devaluation of rupee?
Answer: Devaluation of rupee means decreasing rupee value in the foreign exchange
market.. In 1991, as an immediate measure to resolve the balance of payments crisis, the
rupee was devalued against foreign currencies. This was to boost the export and this led to
an increase in the inflow of foreign exchange.
Question 6: Distinguish between the following
(i) Strategic and Minority sale
(ii) Bilateral and multi-lateral trade
(iii) Tariff and Non-tariff barriers.
Answer: (i) Strategic and Minority sale:-
A Strategic sale is generally the privatization process, where by the major stake i.e. at least
51% or more share in a government organization is sold off to the highest bidder, thereby
handing over the management of the organization to the private or autonomous body. In
Minority sale the Government sell a minority stake, while retaining at least 51% of the
shares along with full management control so as not to disturb the Public Sector character
of the companies.
(ii) Bilateral and multi-lateral trade: -
Bilateral trade means the trade relation between the two countries, while multilateral trade
is the multi countries trade relation.
(iii) Tariff and Non-tariff barriers: -
A tariff is a duty imposed on goods when they are moved across a political boundary. It is
economic policy of restraining trade between nations. Tariff are usually imposed on
imported goods.
Non-tariff barriers are trade barriers that restrict imports but are not in the usual form of a
tariff. It may be quality conditions imposed by the importing country on the exporting
countries, Sanitary and phyto-sanitary conditions, packaging conditions, Product standards
etc.
Question 7: Why are tariff imposed?
Answer: A tariff is a duty imposed on goods when they are moved across a political
boundary. It is one of the major sources of revenue for the Government. But They are
usually associated with protectionism, the economic policy of restraining trade between
nations. For political reasons, tariffs are usually imposed on imported goods, although they
may also be imposed on exported goods.
Question 8: What is the meaning of quantitative restrictions?
Answer: Quantitative restrictions are specific limits imposed by countries on the quantity or
value of goods that can be imported or exported. Quantitative restrictions can be in the
form of a quota, a monopoly or any other quantitative means. In other words, quantitative
restrictions refer to non-tariff measures, which are taken to regulate or prohibit
international trade. In order to protect domestic industries, India was following a regime of
quantitative restrictions on imports. This was encouraged through tight control over imports
and by keeping the tariffs very high.

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Question 9: Those public sector undertakings which are making profits should be
privatized. Do you agree with this view? Why?
Answer: The profit making public sector undertakings are the great source of revenue for
the Government but these are needed to run or manage properly otherwise these turns into
a huge burden for the Government. I am not against the privatization but we need to retain
some profit making public sector undertakings to check the monopoly in the market. Only
thing that the government should give certain autonomy and accountability to the
managements of those profit making undertakings in their workings so that they remain as
the profit making units in this competitive market.
Question 10: Do you think outsourcing is good for India? Why are developed
countries opposing it?
Answer: Outsourcing is good for India, since it has generated the new employment
opportunities in the Indian economy, contributed in GDP and has increased the foreign
reserve in the country.
Developed nations are opposing it, since their people are losing their jobs due to high wage
rate in their countries as compared to India, while the skill levels are more or less same.
Question 11: India has certain advantages which makes it a favourite outsourcing
destination. What are these advantages?
Answer: The low wage rates and availability of skilled manpower in India have made it a
favourite destination for global outsourcing. Most multinational corporations, and even small
companies, are outsourcing their services to India where they can be availed at a cheaper
cost with reasonable degree of skill and accuracy.
Question 12: Do you think the navaratna policy of the government helps in
improving the performance of public sector undertakings in India? How?
Answer: In 1996, in order to improve efficiency, infuse professionalism and enable them to
compete more effectively in the liberalized global environment, the government chose nine
(later two more PSUs are given the same status) PSUs and declared them as navaratnas.
They were given greater managerial and operational autonomy, in taking various decisions
to run the company efficiently and thus increase their profits. Greater operational, financial
and managerial autonomy had also been granted to 97 other profit-making enterprises
referred to as mini ratnas.
Question 13: What are the major factors responsible for the high growth of the
service sector?
Answer: The major factors responsible for the high growth of the service sector in India the
low wage rates and availability of skilled manpower. The revolution in Information
Technology (IT) field in India has also played a major role in the high growth of the service
sector.
Question 14: Agriculture sector appears to be adversely affected by the reform
process. Why?
Answer: Reforms have not been able to benefit agriculture, where the growth rate has
been decelerating. Public investment in agriculture sector especially in infrastructure, which
includes irrigation, power, roads market linkages and research and extension, has been
reduced in the reform period. Further, the removal of fertilizer subsidy has led to increase in
the cost of production. Moreover, since the commencement of WTO, this sector has been
experiencing a number of policy changes such as reduction in import duties on agricultural
products, removal of minimum support price and lifting of quantitative restrictions on
agricultural products; these have adversely affected Indian farmers as they now have to
face increased international competition.
Question 15: Why has the industrial sector performed poorly in the reform period?
Answer: Like the Agriculture sector, the industrial growth has also recorded a slowdown in
the reform period. This is because of decreasing demand of industrial products due to
various reasons such as cheaper imports, inadequate investment in infrastructure etc.
Cheaper imports have replaced the demand for domestic goods. Domestic manufacturers

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are facing competition from imports. The infrastructure facilities, including power supply
have remained inadequate due to lack of investment.
Question 16: Discuss economic reforms in India in the light of social justice and
welfare.
Answer: If the economic reforms have given us an opportunity in terms of greater access
to global markets and high technology, it has also compromised the welfare of people
belonging to poor section. The crisis that erupted in the early 1990s was basically an
outcome of the deep rooted inequalities in Indian society and the economic reform policies
initiated as a response to the crisis by the government, with externally advised policy
package, further aggravated the inequalities.. Further, it has increased the income and
quality of consumption of only high-income groups and the growth has been concentrated
only in some select areas in the services sector such as telecommunication, information
technology, hospitality etc.

SOME OTHER IMPORTANT CONCEPTS:

Securities and Exchange Board of India (SEBI)

SEBI is the regulator for the securities market in India. In 1988 the Securities and Exchange
Board of India (SEBI) was established by the Government of India through an executive
resolution, and was subsequently upgraded as fully autonomous body (a statutory board) in
the year 1992 with the passing of the Securities and Exchange Board of India Act (SEBI Act)
on 30th January 1992.
SEBI has to be responsive to the needs of three groups, which constitute the market:
❖ The issuers of securities
❖ The investors
❖ The market intermediaries.
The Deference between the MRTP Act 1969 and the Competition Act 2002:
❖ The Deference between the MRTP Act 1969 and The Competition Act 2002 is as
follows –
❖ The MRTP Act was enacted in the Pre Liberalization era whereas the Competition Act
is enacted in the Post Liberalization era;
❖ The Object of the old Act was to prevent the economic concentration in one Common
detriment, curbing unfair trade practices, and to check monopolistic activities, on the
other hand the object of the new Act is to promote and Sustaining Competition in the
market and to ensure the freedom of trade and to protect the interest of the
consumer in whole;
❖ The MRTP Commission has the advisory role only whereas the later has some
effective role including that of initiating suo moto actions and impose punishments to
the entities having some adverse effect in the market.

Difference between KPO and BPO, LPO, RPO, HR and MBPO:

What does BPO stand for? What does it mean?
BPO stands for Business Process Outsourcing. Major corporations in the US and Europe are outsourcing
their back office operations to India to save costs. e.g. employee payroll, data entry, voice calling for
back end activities etc. Although these jobs usually are not directly IT-related, their data-based
orientation often means that they require IT departmental support to be successfully outsourced.
What is LPO?
There is a new addition to the BPO family — legal process outsourcing or LPO. When it began, LPO
consisted mostly of low-end transcription work, but no longer. LPO now includes a huge range of legal
processes, such as patent application drafting, legal research, pre-litigation documentation, advising
clients, writing software licensing agreements and drafting distribution agreements. The offshoring of

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U.S. legal jobs is already ramping up, as some experts predict that 79,000 lawyers' jobs are poised to
move from the U.S. to countries like India by 2015.
What is RPO?
RPO stands for Research Process Outsourcing. This is popular in the biotech industry. Clients outsource
their R&D work. This was termed reportedly by India's biotech queen Kiran Mazumdar-Shaw.
RPO also stands for Recruitment Process Outsourcing. RPO is a key component of Human Resource
Outsourcing (HRO). The RPO team basically handles all the recruitment.
What is HRO?
HRO stands for Human Resource Outsourcing. HR is getting outsourced to third party providers who can
bring in the benefits of knowing the domain.
HR as an activity, it comprises of a group of activities, which include payroll management, training,
staffing, benefits administration, travel and expenses management, retirement and benefits planning, risk
management, compensation consulting, etc. These activities are outsourced by which the client can
concentrate on their core competency.
In the US context, HR outsourcing is a huge area. For instance, nearly about 29-30 per cent of the
outsourcing space is HR.
What is MBPO?
MBPO stands for Medical Business Process Outsourcing. Apollo Hospitals is the first major hospital to be
getting into this.
Why KPO?
If we look into any financial newspaper, magazine or any literature giving knowledge about the
outsourcing business in India, what is found to be most referred word is KPO meaning thereby
knowledge process outsourcing. Many new business concerns are coming day by day in Knowledge
Processing Outsourcing Industry and KPO is emerging as a new sector that promises to provide long-term
jobs for intellectual, analytical and knowledgeable people with pay scales much higher than the BPO
sector. The following are the few areas which are being associated with the KPO sector.

• Research & Development

• Financial Consultancy and Services
• Advanced Web Applications
• Business and Technical Analysis
• Learning Solutions
• Animation & Design
• Business & Market Research
• Pharmaceuticals and Biotechnology
• Medical Services
• Writing & Content Development
• Legal Services
• Intellectual Property (IP) Research
• Data Analytics
• Network Management
• Training & Consultancy

Now, why should some company invest time and money in knowledge process outsourcing? The basic
fundamentals of outsourcing apply equally to knowledge based services as well. A shortage of skilled
professionals and availability thereof at higher costs increase the cost of maintaining such services in the
host country whereas the same job can be got done with similar precision and quality and at much lesser
costs abroad. The major KPO benefits which can be derived are described below.

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Benefits of KPO
Standardized technical education is widely available to all in the developing countries especially in India.
This skilled and trained manpower is accessible at very low cost as well. It, therefore, is always a wise
decision and makes sense to utilize such services. Outsourcing of activities to KPO companies can provide
the following benefits:

• Valuable cost savings that can be utilized elsewhere.

• Trained professionals at work.
• Standard operational efficiency.
• Increase in profits.
• Savings in time and management energy for maintaining in house services.
• Option to recruit a larger work force without raising costs.
What KPO can deliver to you?
Any company involved as service provider in the KPO industry works in close coordination and association
with the client and provides services that are predefined in terms of quality and standard of work. While
working with a KPO firm, the outsourcing company can expect to get the following:

• Good quality work.

• Lower costs.
• On time delivery of services.
• Uninterrupted services.
• Adaptability to changes in required quality.
Does it imply that with the rise of KPO entities, BPO (Business Process Outsourcing) become extinct? It is
undoubtable that KPO is a step ahead of BPO but this does not mean the end of BPO. The BPO Industry
will exist and continue to be successful in India. BPO has its own strengths and way to solve a particular
problem and the BPO market is long term in nature as compared to the KPO market. With every passing
day the BPO market expanding and so is the various systems and processes through it. The following are
various areas in which the BPO presence shall not remain in existence but shall also keep growing.

• Data processing
• Basic data entry
• Department Outsourcing
• Provides technical support
• Provides email support to its customers

Even after the entry of KPO in the Indian market, the amount of total revenue earned in the outsourcing
industry in BPO will be higher as compared to the KPO industry. The BPO exports will be as higher as $20
billion by the end of 2010 in comparison to KPO projections of $12 billion in the same period. As per a
recent study done by experts the BPO industry is expected to grow globally at a CAGR of over 26 percent
by 2010.

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